SAUDI ARABIA - Expansion Costs Rising.

Tougher-than-expected technical hurdles and an accelerated schedule are quickly raising costs for Saudi Aramco's expansions. These are in addition to the general rise in project costs worldwide since 2002. Some of Saudi Arabia's upstream costs have risen from a $12-15 bn budget in late 2004 to $35 bn.

Bigger spending poses a challenge to the Saudi state which relies on oil for most of its revenue. Rising oil prices have funded four years of budget surplus ending decades of deficits, but the government is spending much more now due to a dearth of EPC contractors and continuing rise in contract costs - on top of higher social welfare spending to fight off mounting unemployment stemming from a population explosion.

The Mega-Projects: Reinforcing Saudi Arabia's commitment to stability of global energy supply on the kingdom's National Day on Sept. 23, 2005, the CEOs of several of the world's top engineering companies renewed their pledges to work together to get three critical Saudi Aramco mega-projects finished as quickly as possible.

The top men from subsidiaries of General Electric, General Dynamics and the engineering firms of Snamprogetti of Italy, the US-French JV Bechtel/Technip, JGC and Yokogawa of Japan and Technicas Reunidas of Spain brought teams of engineers with them to Milan to meet with Saudi Aramco executive management to discuss progress on schedules, material procurement and Saudisation targets as well as ways to save time and money on oil-processing and gas facilities either under construction or in the engineering phase.

Then Saudi Aramco's VP of Project Management Ali al-'Ajmi said: "These programmes are critical when the whole world is counting on us". The projects involving Hawiyah, Khursaniyah and Ju'aymah processing facilities were progressing at rapid pace. They involve thousands of workers. Saudi executives encouraged the CEOs to take a long view when it came to their associations with Saudi Aramco and that helping the private sector of the entire region would prove to be a great benefit for them and the for kingdom.

Saudi Aramco has completely re-evaluated bidding processes used in earlier contracts and works with partnering contractors in a transparent way. Project managers in contractors' home countries have adopted a team approach, helping the firms to overcome challenges and ensuring schedules are met and potential cost savings exploited. Technip CEO Daniel Valot lauded the sophistication of Saudi Aramco's contracting strategy and said he was promoting its use in the industry as a best practice because of its time-saving and risk-management features.

After hearing the CEOs state Saudi Aramco projects were getting top priority despite exceedingly busy job schedules, Saudi Aramco CEO Jum'ah said: "When there are problems with the world's energy supply, Saudi Arabia has an excess capacity to help keep markets stable. It isn't easy, but we do it. Saudi Aramco has a strategy consistent with the kingdom's policy of having between 1.5-2m b/d of excess capacity. This brings stability to the world economy, and we all benefit from that... we need your commitments to get the jobs done as planned and on time".

In May 2005, the Saudi Aramco's Senior VP for Engineering and Operations Services Salim al-Aydh told a conference on Saudi mega-projects in Dammam big firms were needed to handle the company's ventures, which he said will be worth SR 487.5 bn ($130 bn) over five years. He said the projects would provide engineering jobs to 50,000 Saudis in addition to 700,000 related positions. At an event attended by 900 delegates from the kingdom and abroad, Aydh said oil-related activities in the Gulf during 2005-10 would be worth $421 bn - since then the total estimate has risen to more than $500 bn.

Costs: The cost of producing oil in Saudi Arabia has been the lowest in the world. In the 1950s, the net well-head cost of production was less than 7 US cents/b. In early 1990, this from 14 operating fields, with the Ghawar axis of fields taken as one unit, was put at 50-63 cents/b - calculated on the basis of output then ranging from 5.38m b/d, which was Saudi Arabia's OPEC quota for the first half of 1990, to 7.2m b/d. Now the average of wellhead costs is over $3/b (95 cents/b in 1997), and experts predict higher costs in the coming years in view of falling reservoir pressure in some Ghawar fields. Wellhead costs in Najd are relatively high in view of technical problems there in the past 12 years.

Total costs up to the loading of the crude oils for export, including Saudi Aramco's administrative costs, piping and terminalling, are now said to average about $4.50/b, up from less than $2.50/b in 1993. Costs were reduced as a result of re-organisation and cost-cutting measures (see background in Vol. 61, OMT No. 14)

These costs exclude field maintenance and other items, such as mothballing and de-mothballing in the fields, and the maintenance of gas-oil separation plants (GOSPs), pipelines, storage tanks, terminals, etc. The maintenance element is important, as Saudi Aramco adopts the approach of the US oil majors which is thorough and expensive. There have been varied estimates of Saudi Aramco's field maintenance costs, with one study group having claimed this exceeds $4 bn/year.

In early 1990, after Saudi Aramco's first expansion programme was announced, it was estimated that the cost of expanding the capacity of its developed oilfields in the north-east would be about $15 bn. This meant the cost for an additional 3.5m b/d capacity, over the 7.2m b/d mentioned above, would be $500m for every 117,000 b/d unit including infrastructures. But there were much higher estimates of Saudi Aramco's programme costs subsequently, with the figure of $60 bn mentioned (see omt14SaudiFieldsOct3-05).